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How to avoid double taxation in Canada?

Foreign Tax Credit

Canadian resident for tax purposes or deemed Canadian residents who were present in Canada for 183 days or more in a taxation year are taxed on their worldwide income. So, they have to report their foreign income on their tax return in Canada and may be subject to double tax on foreign income. In almost all the countries except some places in the middle east, there are taxes on income generated by anyone. So, foreign income may have been subject to foreign taxes, accordingly, in order to avoid double taxation on the same income, a foreign tax credit is available to Canadian taxpayers who have paid foreign income taxes. Taxpayer gets the credit for the foreign taxes they paid in the foreign country and it reduces their overall tax payable in Canada. By granting a foreign tax credit, double taxation is avoided. Foreign business income tax credit if not needed in the current year then it can be carried back 3 years or carried forward for 10 years.




Tax Treaties

The Canadian government has signed tax treaties with several countries to avoid double taxation. Treaties are very specific to a particular country. So, use the provisions of the tax treaty whenever it is favorable to reduce overall taxes.


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Becoming a Non-Resident of Canada

Corporation

A corporation ceases to be a resident of Canada:

  • If they are incorporated – when they file articles of continuance to change the jurisdiction of the corporation.
  • If they are not incorporated – then by moving the central management of the corporation to outside Canada.

Impact on Tax

When they cease to become resident of Canada for income tax purposes then there will be deemed year-end immediately prior to ceasing residence and corporation has to complete financial books of accounts and has to file the income tax return for the deemed year-end date.

 

Trust

Trust ceases to be a resident of Canada:

  • When they change Canadian resident trustee and appoint non-resident trustee
  • By holding all the trust meeting outside Canada

 




Individual

Individual ceases to be a resident of Canada:

  • When they sold the home or canceled the lease for the house for his/her dwelling in Canada
  • When his/her immediate family moved out of Canada
  • When he/she becomes the resident of another country for tax purposes

Impact on Tax

  • When an individual ceases to become resident of Canada for income tax purposes, then the taxpayer is deemed to have disposed of all properties, immediately prior to ceasing residence for proceeds equal to fair market value. These dispositions will trigger any gains and losses and the taxpayer has to pay taxes on the gains. Any gains or losses after the deemed disposition will not be subject to tax in Canada.
  • Personal Tax Credit will be prorated for the part of the year based on his/her presence in Canada.


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Separate Entities for Tax Purposes

Understanding the legal entities for the purpose of income taxation is very important. Separate legal entities can enter into contracts, buy assets, borrow money, and sue or be sued in court.

Individual

An individual is a separate legal entity because they can do all of these things and must file a return and pay taxes. An individual must file their return and pay taxes before April 30 for the last fiscal year. For example, for the fiscal year-end on Dec 31, 2017, the due date for the return filing will be April 30th, 2018.

Corporation

A corporation is a separate legal entity because they can do all of these things and must file a return and pay taxes. A corporation can choose any fiscal year-end as long as the does not exceed 53 weeks. Corporate can file their tax return within six months from the end of the fiscal year. For example, for the for the fiscal year-end on Dec 31, 2017, the due date for the return filing will be June 30th, 2018.




Partnership

A partnership can be considered a legal entity because it can enter into a contract, buy assets, borrow money and sue or be sued in court. However, for tax purpose, a partnership is not a person and hence not subject to tax. A partnership firm does not file a tax return, instead, the profit and losses of the partnership are allocated to partners based on their share and partners pay the tax.

General partners (i.e., not limited partners) are personally liable for the losses or liabilities of the partnership firm. Because of this reason partnership is not fully a separate legal entity. General partners unlimited liabilities is the reason to prefer corporations over the partnership to conduct business operations. A partnership must have Dec 31 year-end if any of the partners are individuals.

Trusts

Trusts are not separate legal entity because the trust property is owned by the trustee (i.e., not the trust). But for tax purposes trust is a taxpayer and must file a tax return. Trust must have calendar year-end and are taxed as individuals. Trust must file their return within 90 days after the trust’s year-end.


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